It's not the default that strikes the most fear in the White House and Congress these days. It's the downgrade.
Even Republican leaders say the country can't go into default, and they'll do everything possible to raise the debt limit by Aug. 2.

"It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade.

Even Republican leaders say the country can’t go into default, and they’ll do everything possible to raise the debt limit by Aug. 2.

But what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.

Obama could win and lose at the same time, striking a deal to avoid default but failing to pass muster on the substance of that deal with credit agencies, which could go ahead and downgrade the rating anyway.

Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

It’s what drives his Treasury Department into cajoling and pleading with the bond ratings agencies to be patient, like a harried coach working the refs from the sidelines.
It’s a factor influencing Obama’s rejection of a short-term deal: The administration believes the ratings agencies won’t like it.

And it’s what gives these little-known firms a powerful club that they’re wielding with gusto over Washington policy-makers. They hope to force a deal that not only raises the debt ceiling but also makes deep cuts in government spending and eats into the nation’s deficit.

The threat of a downgrade “is very damaging to all of us, and that would be a product of the dysfunction of Congress” said Rep. Peter Welch (D-Vt.), who led a faction of House Democrats who argued for a “clean” debt-limit increase early in the process, only to watch escalating chatter about the “Armageddon” of a missed deal feed scrutiny of the nation’s fiscal health.

S&P raised the threat of a downgrade July 14 by declaring that raising the debt limit alone might not be enough. It wanted to see an enforceable agreement to cut $4 trillion over 10 years to affirm the triple-A rating.

Administration officials were shocked by the move. They suggested privately that it did not seem to square with prior S&P reports, which said the nation’s larger budget problems could be dealt with over several years. Some administration officials dismissed the S&P report as little more than amateur political prognostication by people with limited understanding of how Washington works.

But the White House’s statements in the past week show a downgrade is now top of mind. Obama himself invoked the country’s triple-A rating in a rare prime-time address Monday as he outlined the consequences of default.

“For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” Obama said. “Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis — this one caused almost entirely by Washington.”

Nearly every debt-limit conversation on Capitol Hill is infused with debate over the potential for either a downgrade, a default, or both. Democrats have embraced the argument of the White House: A short-term plan could result in a debilitating downgrade even if default is avoided.

Republicans are moving forward with their two-phase plan, but they’ve shown some concern about the possibility of ratings agencies scarring America’s creditworthiness. There’s significant disagreement in the GOP about the prospects of default and downgrade, and some lawmakers believe the administration and congressional leaders have created a false panic to box them into voting to raise the debt ceiling.

“The reality is these rating agencies have no idea how to rate a $17 trillion economy like the United States,” Rep. Darrell Issa (R-Calif.) told radio host Don Imus on Monday. “They have no idea how to rate the debt worthiness of a $14 trillion debt like the United States.”

The truth is that Capitol Hill has less insight into the workings of the marketplace than the investment gurus on Wall Street, and even they have varying views on the potential for a downgrade.

There is also no clear sense of how the ratings agencies would ultimately judge the two major plans in the mix.
The Senate Democratic proposal calls for a one-time increase in the debt limit through the 2012 elections coupled with $1.7 trillion in spending cuts and about $1 trillion in savings from winding down the Iraq and Afghanistan wars.

The House Republican bill would raise the debt limit in two phases and mandate a deficit cut of $3 trillion.
But the second debt limit increase next year would depend on Congress adopting the recommendations of new 12-member legislative committee for $1.8 trillion in cuts — far from certain, given the polarized political environment. That lack of certainty could raise concerns with the ratings agencies, Democrats said.

Aiming for any ounce of advantage, Senate Majority Leader Harry Reid (D-Nev.) argued Tuesday that his plan would shield the country from a ratings drop, while Boehner’s plan would not — a statement Boehner’s office contested.

“The $3 trillion House plan is the only one on the table that forces Congress to take on the drivers of our debt,” said Boehner spokesman Brendan Buck, adding that the Reid plan relies on war savings, “an accounting gimmick that will have zero real-world impact on our deficit.”

On a Tuesday conference call with reporters, bank analysts predicted the odds of a default are close to zero, but warned that a downgrade is a growing possibility.
An agreement that sustains a top-notch rating would have to include $3 trillion to $4 trillion in budget deficit cuts over the next decade, said Terry Belton, global head of fixed income strategy at JPMorgan Chase.

Not just that, said Mike Hanson, senior U.S. economist at Bank of America Merrill Lynch, but credit agencies also want the ultimate plan to have strong bipartisan backing.

“It really is important that we need to have a deal that is fairly comprehensive and has fairly broad support,” Hanson stressed.

A single downgrade might have limited market impact. But a move by all three main ratings agencies — S&P, Moody’s Investor Service and Fitch Ratings — would likely force huge investment funds that must hold only the safest of bonds to sell en masse. The scary headlines associated with a first-in-history downgrade also could cause smaller investors to panic and dump stocks.

In a recent interview with POLITICO, David T. Beers, head of sovereign ratings at S&P, said the July 14th report was not a major shift and simply reflected an increased concern that there is no clear path to significant deficit reduction.

“What we are focused on is not the debt ceiling but the underlying state of public finances,” said Beers, a London-based executive who has conducted multiple meetings with administration officials.
In order to maintain a triple-A rating, Beers said, “what would have to emerge would be something that has a material impact on the underlying fiscal issues.”

“None of us know what this agreement is going to look like,” Beers said. “For us to think it is credible it would first of all have to show some choices about what the fiscal priorities are and be actionable in ways that would give us confidence that it is going to be implemented.”

Thursday July 28, 2011, 1:30 am
This is the best analysis of the role of S&P in this mess I've seen. S&P helped open eyes to the seriousness of a default, but it's also are treating the US like the EU treated Greece. That kind of austerity will send the US into a double dip recession. One can almost feel the global reach of the masters of the universe tightening around the collective throat of all of us ordinary Americans.

I almost feel sympathy for Obama. Almost. Strong use of his Executive authority still might stop this madness and almost certainly could have headed it off if he hadn't wasted so much time trying to out deficit-hawk the GOP.

To paraphrase Bill Clinton (on more than one occasion): It's the Fourteenth Amendment, stupid.

Thursday July 28, 2011, 2:09 pm
"Obama could win and lose at the same time, striking a deal to avoid default but failing to pass muster on the substance of that deal with credit agencies, which could go ahead and downgrade the rating anyway."
Who in the hell died & made Standard & Poor's the King of anything???? The United States HAS Assets, Land, & People enough to HOLD our Own - our foreign creditors can't come take Anything From Us & WE OWN most of the Nation's Debt anyway! So HOW can the top three "credit ratings agencies" hold US hostage? DROP THEM, run them out of business, sic the IRS on their Lying A$$es (why didn't they WARN us about ALL the crap Before????)!!!!!!

Friday July 29, 2011, 12:41 pm
Sounds like Wall Street may be suffering a little "buyers' remorse"... thinking that they could put the teatards in office long enough to get them some goodies, then throw them overboard. Little did they realize that the ones they intend to throw overboard (along with the rest of us) are arctually the ones most actively drilling holes in the bottom of the boat.

Friday July 29, 2011, 12:44 pm
I just tried to post a comment on Fox News about how I felt about what the republican tea partiers were doing to the economy. I did not swear or use any questionable language. When I hit enter, I got a pop-up that said my "comment needed to be previewed by a moderator" before it could be posted. I have posted 3 times before in disagreement of a story. Am I now black balled? Any one ever have this happen?

Friday July 29, 2011, 12:58 pm
I am in shock, I tried to post again to a Fox News story and was not allowed. They are censoring the website. I could not believe that there was only one point of view being posted which was pro-republican. When I tried to post my own opinion, it went unposted. I CALL THIS CENSORSHIP AND I AM ANGRY!

Friday July 29, 2011, 1:24 pm
The fact is the Repug/Tea Bagged will not do anything to prevent either the Defalt or the Downgrade, they are perfectly willing to watch America swirl down the economic toilet to prevent the Rich and Corporations from paying their fair share in TAXES. The Repugnican/Tea Bagged Pledge to Norquist is held to be more sacred than their Oaths of Office.

Friday July 29, 2011, 1:38 pm
Sorry Pamela, I don't know what is going on. I don't flag anything unless there is a personal mean spirited attack on another member. Opposing views are what we are here for. Lilith and I never agree, but I don't stop the posts, nor would I. If you can send me a personal message and let me more in detail what happened to you. Sorry.

Friday July 29, 2011, 3:15 pm
Why do we still pay any regard to Moodys, S&P, etc., especially considering their triple A rating for junk mortgage securities just before the housing collapse. The ratings agencies are packed with greedy criminals, and their opinion should mean squat!

Friday July 29, 2011, 4:20 pm
I want to discuss --one more stupid arguement by the right wing teas/ r's / and all other fools.
Cap spending and have a balnced budget.
The governemnt is the last resort as the go to person on any thing.
The people who was caps and baances and downsizing, shouldn't be in government . With all the doctorates and PHD'S you would think they would know this.
WHICH IS; you keep getting us into wars and unnecesaary stuff, that cost monies. You keep overpaying haliburton and XE for dumb stuff costing life and limb and destruction and the cost of rebuilding stuff for non americans to enjoy.
You promised we/america would get oil monies out of IRAQ. You said the troops were coming home from AFGANISTAN and panetta is keeping all 70,000 troops there til God knows win. Now the stupedist people in the world are running congress.
How does anyone think anything is going to ever get balanced. You got CIA prisons all over the world doing God knows what and you want to balance something?
The stupidest people in congress are dismantling every reasonable bill in every catorgory and you are balancing and capping what?

When national, natural disasters happen what budget are you capping? When the national guard or anything otherwlse is called out, let's say, fire fighters etc in overtime emergencies, what are you capping?
When trouble unexpected comes to your state and extra help is needed who are you going to call cause the fools are running the government.
BYW; I don't believe any of them are telling us the truth. america gets monies from other sources besides taxes. If we don't recognize this we will let ourselves be hoodwinked even more.
They are not being truthful to us. As long as no recognition is made of it so long goes this conversation.
I tried to sit as quiet as I could . Like why don't you smart fellas see this. The budget can't be capped cause we have a country to run. All this imperialism and false flags has bought us to this place. Not entitilements or domestic spendings. It' THE GREED OF IT ALL.
Americans have given more than they get out of this deal. whether thru time, talent, money, loss of limb,sanity and life. it's time to stop picking on americans and the domestic policies that make lfe bare able and civil. OR ONE DAY THE VERY ONES WHO TURN A DEAF EAR WILL GET A TASTE OF THEIR POLITICS AND THEY WON'T FARE WELL UNDER THEIR OWN LAWS AND DECEITS.

Tuesday August 2, 2011, 8:18 am
Live by capitalism, die by capitalism. This is simply the free market making its judgement of a failing business model. US business has been run for a generation by financial jugglers rather than wealth creators, and the market can no longer ignore the consequences.